Foot Locker (FL 0.23%) has long been a staple in the footwear industry. The upcoming earnings report on Aug. 28 makes this an ideal time to revisit the previous quarter and assess Foot Locker's position in the market to see if savvy investors can cash in both future growth and anticipated dividends.
In my view, the footwear seller offers investors an excellent opportunity that combines growth potential with the allure of dividends.
An attractive dividend in a challenging market
Foot Locker's recent dividend payment of $0.40 per share on July 28 offers a good sign for investors seeking income-oriented opportunities. At the current share price, the dividend yield stands at about 6%. However, the payment coincided with a market downturn, sparked by concerns over potential consumer spending pullbacks. This market shift introduced a level of uncertainty, impacting Foot Locker's stock price.
In the last quarter, Foot Locker faced a significant challenge, with a notable 9.1% decline in comparable-store sales. The decline was a result of multiple factors, including reduced income tax refunds in the U.S. and the repositioning of Champs Sports. Total sales dropped 11.4%, a figure that narrows to 10% when excluding foreign exchange rate fluctuations. These types of downturns often provide an opportunity to buy the dip, but they can also be a sign of market weakness.
Comparative sales may cause concern
Comparative sales data for the previous quarter reflects a challenging period for Foot Locker. The company reported a significant 400-basis-point decline in its gross margin from the prior-year period. This is likely due to a combination of factors, many of which may well prove temporary.
Foot Locker also saw a noticeable 110-basis-point increase in selling, general, and administrative expenses (as a percentage of sales) compared to the previous year. Increased expenses and decreased margin could also give many investors pause.
Its store base and financial position remain solid
Foot Locker displayed a proactive approach to its store base during the previous quarter. The company opened 13 new stores, engaged in the remodeling or relocation of 18 existing stores, and made the strategic decision to close 35 stores. This deliberate management of the store portfolio showcases Foot Locker's responsiveness to market dynamics and its commitment to optimization.
Meanwhile, the balance sheet had $313 million in cash and cash equivalents and $451 million in debt at quarter-end. This financial snapshot provides valuable insights into Foot Locker's liquidity position and its ongoing management of financial obligations. The footwear company appears to have the cash on hand to continue its revitalization plan and recover from the current dip over time.
Consider buying the dip for growth and the dividend
As the next earnings report approaches, Foot Locker faces a nuanced landscape, presenting both challenges and opportunities. The recent dip in share price, attributed to concerns about consumer spending, has piqued the interest of investors. Simultaneously, the dividend yield, hovering around 6%, remains an enticing prospect for those prioritizing income generation.
Foot Locker's strategic adjustments, despite the challenging quarter, underscore the company's adaptability in a rapidly evolving market. With a fluctuating store base and a financial structure balancing cash reserves and debt, Foot Locker appears well-equipped to navigate the dynamic retail sector.
Whether you're looking for growth or dividend income, the current circumstances suggest that the current dip in Foot Locker's stock price may present an opportune moment to gain both.
